Research Hot Topics Manufacturing employment has been falling in all developed economies since 1970. In fact, in 1970, manufacturing jobs in America made up around 25% of the work force. Today that number has shrank to 10-13%, depending on what report you see. (In 1950, about 35% of jobs were in manufacturing.) Is it because of the shifting of production en masse to China? Experts say no. China, too, has lost manufacturing jobs. Despite the loss of manufacturing jobs in America, real output has been growing at an annual pace of almost 4% since 1991. America remains the world’s biggest manufacturer, with Japan in second place, and China in a distant third, producing $700-billion worth of manufacturing goods, half of America’s total. Should we worry? By most accounts, the decline in manufacturing employment in America and elsewhere does not represent a shift of production from developed economies to China, but instead, it reflects the rapid productivity growth. China has six times as many manufacturing workers as America, but they are much less productive. In the US, an hour of work produced four times as much manufacturing output in 2000 as in 1950. “Productivity is the best single measure of what leads to differences in economic performance,“ writes William Lewis, director emeritus of the McKinsey Global Institute. The average productivity growth rate of 3.39 for the last five years, from the first quarter of 2000 to the first quarter of 2005, is the highest over the past half century. Manufacturing output, or productivity, has been growing strongly, not declining. Therefore, the fall in employment in America and elsewhere should be seen as a good thing. Deindustrialization – the shrinkage of industrial jobs – is a natural stage of economic development. As a country gets richer, it is inevitable that a smaller proportion of workers will be needed in manufacturing. The first reason is that households only need so many tangible items – cars, refrigerators or furniture, so as they become richer, they tend to spend more of their income on services, like vacations, health and education. Secondly, it is much easier to automate manufacturing than services. Faster productivity growth means fewer workers are needed. So, should we worry? Maybe not as much as previously thought. The continued growth in manufacturing output shows that the fall in jobs has not been caused by the mass substitution of Chinese goods for locally made ones. It has happened because rich country companies have replaced workers with new technology to boost productivity, and shifted productivity from labor-intensive products such as textiles, to higher-tech, higher value-added, sectors such as pharmaceuticals. Employment in rich countries will have to shift towards higher skilled jobs to maintain economic growth. Countries that prevent this from happening risk being left behind. Future prosperity will depend not on how economic activity is labeled, but on the economies’ ability to innovate and adjust their capacity. |